The Hidden Costs of Flipping a Home
House flipping isn’t as glamorous as seen on television. HGTV does a phenomenal job at showcasing the reward in fix-and-flip ventures—while successfully minimizing the perceived risk.
In reality, the glitz and glamour that go behind a renovation almost always come hand in hand with grit and grime. The exterior of your newly purchased fixer-upper might have looked in need of just a few band aids here and there, only for you to open the door to a slew of additional maintenance problems inside.
If you’re considering entering the fix-and-flip biz, be sure you know the host of hidden costs you could uncover. Give this list a onceover—then read it twice more—to safeguard your investment and protect your profits.
Before even stepping foot onto the property, there are some tell-tale signs that might point to some pretty serious damage.
- Water stains: Scope the property’s exterior and check for large water stains. We don’t mean hard water stains caused by sprinklers, but rather those large, oblong spots affecting the paint on the upper portion of the wall.
If you see any, it might mean water damage. This could be as simple as a leaky pipe or as involved as broken drain; either way, it’s a cost you don’t want to incur.
And you know what often goes with water damage? Mold—another costly expense that could require a fortune to eradicate.
- Cracked pavement: Large cracks in the exterior concrete are major concerns; they almost always indicate foundation damage, which is one of the most expensive rehab costs. Besides crackes in pavement, look for the cracks in the walls too – they are also a sign of foundation damage.
Simply hiring a structural engineer to survey the property could set you back $500, and depending on what’s uncovered, could set your project back by months. Be sure to sidestep any investment property that could have foundation problems lurking beneath.
- Sagging roof: Does the roof appear to sag in some spots? The sagging is less likely due to framing issues and more likely explained by rotten or saturated sheathing. If that’s the case, the roof will have to go and the cost of its replacement will be no small number.
- Landscaping: Almost always, your fix-and-flip will require a bit of yard work—but don’t underestimate this number. Do you know just how much it costs to remove that dead tree? In some cases, up to $1,500, so assess your landscaping needs very carefully.
Once you enter the property, take a look around for some red flags that could indicate some hidden costs. Discovering these now versus later is critical because it could completely alter the room in your budget.
- Water damage: Any unusual wall stains should be taken as serious water damage indicators. Check for areas of walls that appear swollen or soft to the touch; this likely means that it’s been exposed to water.
- Bad plumbing: Odd sounds coming from faucets? Unpleasant scents coming from drains? A professional plumber will have to figure out exactly what’s going on, but these are examples of plumbing issues which could be costly to repair.
- Electrical problems: Unchecked electrical problems can lead to house fires—and cause your investment to literally go up in flames. Watch out for hot outlets or switch plates, sparking, dimming or flickering lights, buzzing, blown fuses and frequently tripped breakers.All of these could point to some faulty electrical wiring, and should mandate a professional’s point of view. Out of sight does not mean it can go out of mind, so be diligent with your electrical inspection.
Fix-and-flips are usually budgeted in terms of rehab and maintenance costs, and many investors fail to consider the lengthy list of fees associated with this type of purchase.
- Transaction fees
- Home inspections
- Property taxes
- Dumpster costs
- Selling fees
… the list goes on and on. Fix-and-flips can be lucrative money-makers or they can be down-right money pits. Depending on what hidden costs you uncover, you might have to reevaluate that budget to stay in the green. Plus, you may need to get creative with your capital resource; for some, it might mean hitting up a local financer. Those on the California coast might have to approach Santa Barbara hard money lenders, or in Illinois, a mortgage company in Chicago, while a real estate entrepreneur in New York may need to look for assistance from an angel investor.
Remember: No granite countertop is worth more than your investment’s security, so always prioritize safety over aesthetics. If you feel confident about the unforeseen obstacles you might face, go forth and house flip!